Quora Answer: Do You Lose Money in a Savings Account?

The following is my answer to a Quora question: “Do you lose money in a savings account?”

In real terms, you lose money in any vehicle where the return on the investment, the interest earned, is lower than the rate of inflation.  In Singapore, for example, even the very highest interest rates for savings accounts do not reach 2.5% per annum.

In Singapore, the official inflation rate is low, at around 1.33% in 2018.  However, that is not the full story.  In Singapore, inflation is measured using the cost price index, which is a basket of select goods and services consumed.  This would mean, for example, that if you eat your favourite prawn noodles, and it cost 20 cents more than last year, according to the CPI, we could say that the inflation is that 20 cents.  However, we must also consider that while the prawn noodles did cost 20 cents more, they also gave you one fishball less, and used a cheaper sauce.  If we were to factor that, the inflation is much more than that 20 cents.

Likewise, if we were to consider inflation in those real terms, applied to everything we consume, at a higher price for less, whether less quantity or quality, the inflationary impact on us is much more than the official inflation calculated on the CPI.

As a rule of thumb, for a stable economy, such as Singapore, we should consider that inflation to be around 2.5%, and any investment, any deposit, that earns less than that, is viewed to be diminishing in value, in real terms.  You most certainly lose money in savings accounts.  This is why ordinary people have savings accounts, and wealthy people have investment accounts, current accounts, and checking accounts.